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Update 2 - ADL Fire Sale EVEN Trapped Market Makers! A sudden wave of volatility wiped out $19.3 billion in leveraged positions in hours, the largest single-day loss ever. Exchanges like Binance, Bybit, and Hyperliquid resorted to Auto-Deleveraging (ADL), a fire sale that closed profitable trades to save their systems. Even market makers, who stay “delta neutral” aka short perpetuals with long spot holdings, got burned themselves. ———- Let’s quickly go over what ADL is & how it protected the system #AutoDeleveraging (ADL) is the last-ditch tool for exchanges offering leveraged futures and perpetuals. When traders’ losses exceed their collateral and liquidations fail due to low market liquidity, an insurance reserve fund covers the gap. If that insurance fund runs dry, #ADL kicks in, forcibly closing Profitable positions to offset losses. This protects the exchanges themselves from collapse, ensuring solvency, but it slashes gains for winning traders, making it a brutal but necessary safeguard. October 10: As $Bitcoin crashed 10-15% from $122,500 to $104,600 and $Ethereum fell 21%, $Solana 25%, and meme coins like $DOGE tanked up to 99%. Liquidations overwhelmed exchanges, draining insurance funds. #ADL triggered and Market Makers themselves caught in ADL’s Crosshairs. Market makers, who provide liquidity via tight spreads, rely on delta-neutral strategies: short perpetuals paired with long spot holdings. This balances risk, profiting from fees. But October 10’s ADL broke them. Let’s look at example of a small mm - •Position: Short $1M BTC/USDT perps at $122,000 (10x leverage, $100K margin), hedged with 8 BTC spot ($976,000). •Crash: BTC drops to $105,000. The short gains $170,000 unrealized profit; spot loses $136,000. Normally near-neutral. • ADL Hits: Bankrupt longs force Binance to close profitable shorts at $110,000. The market maker locks $120,000 profit on the prep side $50,000 less—while spot stays down $136,000. This led to Market makers slashing order book depth. This created a feedback loop: thin books forced more ADL, which scared off liquidity providers, prolonging volatility. Even post-crash, hesitant market makers slowed recovery, as traders faced wider spreads and slippage, highlighting centralized exchanges fragility in extreme conditions.